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China Mobile Ltd. (NYSE: CHL, SEHK: 0941) is China's dominant mobile service provider, with 60% national market share. It is the world's largest telecommunications company by subscriber count, with 584 million subscribers as of December 2010.[1] Its size gives it an efficiency and resource advantage over its competitors, but brings a burden as well. As the shining star of the Chinese telecom industry, China Mobile is expected to be a main financial supporter of any home-grown telecom technologies.

China Mobile is currently focusing its domestic expansion and development resources on rural market capture. Rural markets are much more sparsely penetrated than urban ones, and China Mobile's extensive existing network gives it a significant boost in the race to grab as many of the rural market mobile users as possible. China Mobile's future success will depend in large part on its rural expansion.

The Chinese government plays a large role in regulating the telecom industry, and China Mobile is very much subject to any disturbances that may come from that direction. In May 2008, China Mobile lost $26B in market value when the Chinese government said it would start to merge smaller rivals to increase competition.[2] In an effort to build its 3G network, China Mobile signed a $1 billion deal with Alcatel to provide the infrastructure for the network. The ensuing distribution of licenses will have a huge impact on China Mobile's course for the next few years.

China Mobile provides a range of mobile telecommunications services in all 31 provinces, autonomous regions and directly administered municipalities in Mainland China, as well as in the Hong Kong Special Administrative Region of the People’s Republic of China.[3] As of December 31, 2010, the company reported about 584 million subscribers.[1] China Mobile Limited offers mobile telecommunications services principally using the global system for mobile communications (GSM) standard.[3] Beginning from January 7, 2009, it also offers mobile telecommunications services using the time division-synchronous code division multiple access (TD-SCDMA) standard. The Company operates its third-generation (3G) business based on a core mobile telecommunications network that is shared by both its second generation (2G) and 3G businesses and TD-SCDMA wireless network capacity leased from CMCC.[3]

The Company provides roaming services to its customers, which allow them to access mobile telecommunications services while they are physically outside of their registered service area or in the coverage areas of other mobile telecommunications networks in other countries and regions, with which the Company has roaming arrangements. As of December 31, 2009, its GSM global roaming services covered 237 countries and regions, while its general packet radio service (GPRS) global roaming services coverage was extended to 182 countries and regions.[3]

China Mobile's vast size gives it an important economic scale advantage in telecom, an industry which rewards carriers for being large (i.e., many subscribers and an extensive network). The bigger a telecom company, the more free capital it has to spend on growth areas, and thus the better its network coverage, research, distribution, and marketing. This higher-quality service and better public image attracts more subscribers, which leads to yet more growth. In addition, incremental costs (including marketing, advertising, and distribution costs) tend to plateau after a certain point of expenditure: so when a large telecom company grows, the proportion of income spent on incremental costs declines, too.

Business and Financial Metrics

China Mobile reported first-quarter net profit increased to 25.48 billion yuan ($3.73 billion) from 25.2 billion yuan a year earlier. Revenue rose 7.7% to 109.09 billion yuan from 101.27 billion yuan. The 1.1% gain in earnings was slower than the company's 5.2% rise a year earlier.
China Mobile's average revenue per user slipped to 70 yuan in the first quarter from 73 yuan a year earlier because of a drop in mobile tariffs. New subscribers were mainly low-end users. China Mobile said Tuesday that it added six million subscribers in March, up from 5.5 million in February. The March gain included 3.4 million 3G subscribers.

Business Segments

China Mobile’s voice business focuses on enabling its customers to make and receive calls with a mobile phone at any point within the coverage area of the Company’s mobile telecommunications networks. The services include local calls, domestic long-distance calls, international long-distance calls, domestic roaming and international roaming.

SMS refers to services that employ the existing resources of GSM networks and the corresponding functions of mobile telecommunications terminals to deliver and receive text messages, including customer-to-customer messages, Monternet-based short messages and others. SMS offers multi-functionality to the Company’s customers. Short message usage volume reached 681,225 million messages during the year ended December 31, 2009. Handset Internet Access is a service provided by the Company to its customers enabling wireless access to the Internet (including both wireless application protocol (WAP), and World Wide Web (WWW) Websites). Color Ring refers to the service where customers can customize the answer ring tone from a selection of songs, melodies, sound effects or voice recordings to replace ring connecting tone that the caller would hear. It also offers wireless music products based on Color Ring, IVR for Wireless Music and Ringtone Download. The Company recorded 82 million times of music downloads in 2009.

Mobile Paper is a business developed by China Mobile Limited in co-operation with mainstream media in Mainland China and elsewhere, which provides customers with updated information services (including contents, such as news, sports, entertainment, cultural activities and lifestyle) through MMS, Handset Internet Access and other types of service. The number of paying customers of Mobile Paper reached 49.12 million as of December 31, 2009. MMS is a technology that allows users to exchange multi-media communications, such as graphics, animated color pictures, sound files and short text messages, over wireless networks. 139 Mailbox provides customers with typical Internet-based mailbox functions and enables them to send and receive, as well as manage their e-mails using SMS, MMS and Handset Internet Access. The number of active customers of 139 Mailbox reached 23.75 million as of December 31, 2009.

Fetion enables mobile customers to communicate through various means, including SMS, for chatting, dating or interactive entertainment. The number of customers of Fetion reached 62.56 million as of December 31, 2009. The Company has launched Mobile Market, providing customers with an open platform that enables downloads of mobile software and applications. It has also launched its OMS platform, an intelligent mobile terminal software platform. Jointly working with handset vendors, the Company has launched OPhone handsets and provided an end-to-end mobile Internet user experience.

Trends and Forces

Rural Market Expansion

China's rural regions remain largely untouched by cellular companies: total market penetration is just 12% (compared to 32% overall nationally). In addition, the Chinese government's recent focus on addressing the urban-rural divide by increasing rural income and development means that the rural population may experience an increase in demand for cellular services. China Mobile's already extensive physical network of cellular signal centers means that it is in prime position to take advantage of this developing rural market.

High Rural Profitability

Mobile companies' standard profitability indicators include ARPU, average revenue per user. Most rural subscribers tend to favor the most inexpensive and basic plans, depriving mobile carriers of the more profitable added-value voice and data services. Thus, rural ARPUs are usually expected to be lower than urban ARPUs, making each rural subscriber less profitable to the company on average than each urban subscriber. However, China Mobile's current rural ARPU of RMB40-50/month is significantly higher than is needed for rural break-even (RMB30/month; US$1 is apprx. 7.9RMB). Rural areas can be much more profitable than expected, for a number of reasons:

Rural ARPUs are lower than urban ARPUs by about RMB30/month, but rural building and maintenance costs are also lower.

A significant minority of rural subscribers (small-business owners, migrant seasonal workers, or students) have relatively liberal spending habits. Many small farmers are also growing dependent on value-added data services, including SMS reporting of weather conditions and crop price fluctuations.

Cellular substitution in rural areas has been a more prevalent than expected. Many rural Chinese are replacing fixed-line phones with mobile phones as China Mobile begins to undercut fixed-line prices. New models of cellular phones that mimic the look and feel of traditional fixed-line phones further encourage the cellular substitution trend.

The Challenge of Rural Markets

As rural market penetration increases, China Mobile may have difficulty maintaining its rural profitability for two main reasons:

The family-based nature of most current rural subscriptions make it difficult for China Mobile's rural expansion to remain so lucrative. Most subscribed rural families have only one mobile phone and thus can afford to spend a relatively large amount on it. But if the subscriber count goes up, more phones per family will mean less expenditure per phone, resulting in an ARPU drop. If China Mobile tries to get around this by signing up more families, it will have to expand into poorer segments of the population, who again won't be able to spend as much per new subscription.

The Chinese government has been experimenting recently with "New Socialism" in an effort to revitalize certain ailing rural communities. Uncertainty about the effect of these experiments on rural spending capacity and their possible widespread adoption could raise problems for China Mobile's rural expansion plan.

Governmental Regulation

China Mobile Limited's parent company is China Mobile Communications Corporation, a state-owned enterprise that holds 75% of CHL's shares. These close ties to the Chinese government means that China Mobile Ltd. can be pressured into actions not in the best interests of its minority stockholders. Governmental intervention is one of China Mobile's biggest risks.

3G Licensing and Development

The impending introduction of 3G or third-generation mobile technology could potentially damage China Mobile's financial position. 3G's advent means that the Chinese government will have to distribute new operating licenses for competing "standards" (mobile information transmission protocols): internationally-accepted WCDMA, and home-grown TD-SCDMA. The government strongly favors TD-SCDMA for political and nationalist reasons--the coming 2008 Olympics are a particularly big deadline for the standard's launch--but a swich to TD-SCDMA will be expensive, since it requires extensive new infrastructure and testing that the already-established WCDMA doesn't.

Although disputed half a year ago, today it is generally understood that China Mobile's parent company will be required to "lead" TD-SCDMA's network development with support from China Netcom (CN) and China Telecom (CHA). It will take the lion's share of a RMB27 billion (apprx. US$3.4 bn) bill as a way of "fulfilling its social responsibility" as China's leading mobile carrier. China Mobile may only be licensed to operate TD-SCDMA, a blow to its profitability. On the other hand, if the Chinese government throws its full weight behind TD-SCDMA, the home-grown protocol may dominate the Chinese market and make WCDMA irrelevent.

Enforced Restructuring

China Mobile's near-monopoly on the Chinese wireless market may lead government officials either to reorganize and split up China Mobile, or to demand the implementation of policies that would help smaller telecom companies compete. For instance, China Mobile might be forced to introduce one-way number mobility (this lets people leaving the service keep their old numbers, while people switching to China Mobile for the first time still deal with the hassle of getting new numbers), or to allow the use of its extensive cellular network by other companies for roaming.

Overseas Investing

A good overseas acquisition or partial acquisition results in an important additional source of capital for China Mobile, allowing the company to spend yet more on either further investments or on network maintenance. Interests overseas may also act as buffers against fluctuations of the Chinese market, making China Mobile less susceptible to sudden or unforeseen negative economic trends. However, a bad overseas investment could be a huge drain of resources for China Mobile, and could also expose it to negative publicity.

After a long search for an appropriate venue to invest in, China Mobile recently acquired an 89% share in Pakistani telecom company Paktel. While many are enthusiastic about Paktel's possibilities for expansion, others point out that Paktel is the only of Pakistan's 5 telecom companies that has been losing subscribers annually. China Mobile may have to invest significantly in new equipment and marketing to bring Paktel up to speed.

Competition

Of wireless Chinese telecom companies, China Mobile leads the pack. Its only significant competitor in this sector is China Unicom (CHU), a much smaller company which occasionally tries to undercut China Mobile's prices; however Unicom has difficulty sustaining the price advantage because of its lack of resources. Unicom is not well-positioned for rural expansion. Of the two cellular standards it operates, GSM has cheap handsets but spotty coverage in rural areas, while CDMA has better coverage but pricier handsets--a big minus in the frugal countryside. However, if China Unicom is acquired another major telecom company, it could shift the balance of resources enough to threaten China Mobile's position. Lastly, CHL is eagerly searching for cheap acquisitions during the economic downturn, which could better position the company to thrive once the economy goes on an upswing.

Personal Handheld System: the PHS device is a limited-range mobile phone that uses land lines for service. A relatively new technology, total PHS subscription has been increasing at more than 30% a year, "stealing" a sizeable chunk of wireless customers from China Mobile and China Unicom. PHS could develop into a serious threat for China Mobile, especially in rural markets.

Bundling: most industry experts believe that at least one of the two wired-line giants will receive a license that lets them use 3G wireless technology. If so, Netcom or Telecom would be able to bundle broadband internet, 3G wireless service, and fixed-line service in a single package at a competitive rate. China Mobile has no way to offer broadband or fixed-line service and cannot directly compete with this offering.